Pound Sterling Extends Gains on U.S. Bank Debacle

The British pound continues to rally and punched as high as 1.2141 earlier today before retreating. In the European session, GBP/USD is trading at 1.2100, up 0.56%.

There are no economic releases out of the US or UK or Monday, but the markets have plenty to digest after the sudden collapse of the Silicon Valley Bank (SVB). This marked the largest failure of a US bank since 2008 and has caused jitters in the markets over fears that the contagion could spread to other banks.

The Fed and the Treasury Department quickly intervened and said SVB depositors would be protected. President Biden made an unscheduled television appearance and vowed to hold accountable those responsible for the SVB debacle. The President’s pledge may be reassuring, but the fact that he needed to address the nation reflects the concern that SVB could trigger a full-blown banking crisis. Over the weekend, New York officials closed Signature Bank (NASDAQ:SBNY), one of the main banks in the cryptocurrency sector.

Markets scale back rate bets after SVB

The SVB collapse has hurt the US dollar, as market pricing of interest rate expectations has massively shifted. Last week, the markets priced a 50-bp hike at 70% and a 25-bp increase at 30%. Currently, there is a 70% likelihood of a 25-bp increase and a 30% chance of the Fed holding rates at 4.75%. The dust hasn’t yet settled from the SVB failure so it’s understandable that the markets are jittery. If it becomes clear that no further banks are in danger of failing, we could see the markets again price in a 50-bp increase.

On Tuesday, we’ll get a look at key releases on both sides of the pond. The UK releases employment, with unemployment claims expected to fall by 12,400 in February, following a 12,900 decline in January. In the US, all eyes will be on the February inflation report, with headline CPI expected to fall to 6.0%, down from 6.4% in January. I expect further volatility from GBP/USD on Tuesday.

GBP/USD Daily Chart

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